«The purpose of this article, the first in a series of five articles, is to explore the educative process of financial accounting. This first article ...»
Instructional Case—Hypo Corporation, The Financial Accounting
Educative Process, A Void!
Charles E. Stahl, III
In Memorial: Greg R. Dunning, deceased
University of Windsor
The purpose of this article, the first in a series of five articles, is to explore the educative process of
financial accounting. This first article will review, generally, the current state of financial accounting
education in North America (the United States and Canada) and identify a significant void in the educative process. Moreover, a hypothetical instructional case will be presented which the author has successfully used over the years to fulfill this void. Hypo Corporation is a hypothetical case initially developed as a formative/summative assessment tool in 1986 for use in an Intermediate Accounting II course. The educational pedagogy in financial accounting too often focuses on the teaching of many discrete topics with little time devoted to the integration of the topics. The primary requirement of the case is to prepare a complete set of financial statements including footnote disclosures thusly integrating many topics. The second article, in this series of five, will present a survey of the literature concerning the use of Problem-Based-Learning/Case Studies Method in accounting with its application to the Hypo Corporation case. The third article is a quasi-experimental study of student perceptions of the Hypo Corporation case. The fourth article is a replication of the study of the third article and the fifth article will present the recommended solution to the case.
“A richer scholarship then mine is requisite to do the work aright. But until that scholarship is found and enlists itself in the task, there may be a passing interest in an attempt to uncover the nature on the process by one who is himself an active agent, day to day, in keeping the process alive. That must be my apology for these introspective searchings of the spirit.” (Cardozo, 1921, p. 13)
INTRODUCTIONAs accounting educators, we must be ever mindful that our primary objective is to educate tomorrow’s professional accountants who will become experts in the area of financial accounting. For over three decades now, the academic accounting profession has been “admonish[ed]” (Adler and Milne, 1997, p.191) and “the subject of international criticism” (Duff and McKinstry, 2007, p. 183) for its failure to teach the requisite competencies needed for success in the accounting profession. Much has been written about the need for change, world-wide.1 Albrecht and Sack (2001, p. 18) attributed the need for change to three key factors as follows: (1) changes in “technology”, (2) the “globalization” of the world’s economy and (3) the “concentration of power among certainmarket investors.” Lin et al. (2005), in Journal of Accounting and Finance vol. 13(6) 2013 209 keeping with Albrecht and Sack (2000) and Francisco and Kelly (2002), identified two areas for possible change being (1) a “knowledge” base requisite for the profession and (2) the development of needed “skills”.2 Lin et al. (2005 p. 152) also noted that “change should also be made in the pedagogy of accounting programs” highlighting “[i]nnovative teaching methods” such as case analysis and active participation by students. Their survey of practitioners, faculty and students along with the results from surveys by Albrecht and Sack (2000) and Francisco and Kelly (2002) identified 19 areas for the “Knowledge” base with “financial accounting” uniformly being ranked number 1 (Lin et al., 2005, p.
156, emphasis added). It should be noted that “ethics and social responsibility” was listed as a desired element under “Knowledge” base in the Albrecht and Sack survey. The Lin et al. (2005) survey also contained 18 items identified as possible requisite “Skills”. Written communication skills (average ranking of 3.3 of the 18 items) and analytical/critical thinking skills (average ranking of 3.6 of the 18 items) were both ranked relatively high as desired “Skills”.3 The Lin et al. survey identified 7 items as “Pedagogy” with “Analysis of information” ranked number 1 and “Case analysis” being ranked number
3. Taken together, “Skills” and “Pedagogy” have been commonly referred to as “so-called ‘soft’ skills” (Bolt-Lee and Foster, 2002, p. 35). Despite being “admonish[ed]” and criticized, a better characterization would be that accounting education is being continuously improved.
“Perhaps a more accurate view is to recognize that it is misguided to view accounting education as either broken or fixed. The reality is closer to a continuous improvement process, whereby professors listen to the demands of a changing world and make corresponding incremental changes in their courses. The broader point is that educators are indeed paying attention to the calls for a model of accounting education that emphasizes thinking over memorization.” (Kachelmeier, 2002, p. 37) Also, the characterization of “Skills” and “Pedagogy” as “soft” skills” should not be construed as diminishing their relevant importance.
Moreover, it appears that the continuous improvement process has yet to subside. The American Accounting Association and the American Institute of CPAs (AICPA) has established the Pathways Commission or the Commission on Accounting Education: “Pathways to a Profession: Charting a National Higher Education Strategy for the Next Generation of Accountants.” Established in 2010, the Pathways Commission has been charged to study the future structure and content of accounting education. With their report being issued in August, 2012, the Commission has recommended the “creation of a task force, led by educators and including broad representation across disciplinary areas and practice, to engage the community in defining the foundational body of knowledge for accounting” with a “Collation of Core Competencies Across Accounting Organizations.” (The Pathways Commission, 2012, p. 131).
The International Federation of Accountants has identified that the “overall objective of accounting
education is to develop competent professional accountants” and has stated:
“For example, a desired competence for a professional accountant working in a financial accounting role may be the ability to produce a set of company accounts in full accordance with International Financial Reporting Standards (IFRSs) and national legal regulatory requirements.” (International Accounting Education Standards Board, 2009, p. 6) Finally, a review of the literature and the problems/cases contained in the leading Intermediate Accounting textbooks in the U.S. and Canada has not produced a single case with the learning objectives inherent in the Hypo Corporation case. Given the integrative nature of the topics included in the Hypo Corporation case, the author believes that this is a void in the educational process. The students are required to prepare a complete set of financial statements (company accounts) including footnote disclosures. The purpose of this paper is to present the author’s approach towards advancing this primary 210 Journal of Accounting and Finance vol. 13(6) 2013 objective by way of a hypothetical financial case used to supplement a typical intermediate accounting textbook while at the same time fulfilling this void.
The author has organized this paper into four sections. The first section presents a general overview of the financial accounting educative process in North America. The second and third sections present a brief History of the Hypo Corporation case followed by the Learning Objectives of the case. The final sections presents a summary and Exhibit 1- The Case.
THE FINANCIAL ACCOUNTING EDUCATIVE PROCESS
Accounting Education: Generally The traditional approach to accounting education in the United States of America and Canada has been to have the students complete two courses in Accounting Principles, usually one course in Financial Accounting and one course in Managerial Accounting, followed by a two or three course sequence in Financial (Intermediate) Accounting as shown in Table 1.
Although this is a generic, traditional sequencing of courses, variations are numerous depending upon the individual university’s mission or the student’s area of concentration (i.e. a certified public accountant/chartered accountant emphasis, a managerial accounting emphasis, an accounting information systems emphasis, a forensic accounting emphasis or an internal auditing emphasis). The “sh.” means semester/credit hours whereby a student will normally complete 15 credit hours per semester with a total of approximately 120 credit hours needed for a baccalaureate degree. Traditionally, the split between general education courses and business courses including accounting has been a 50%-50% split with accounting courses comprising the major area of study. This generally translates into approximately 60 credit hours of general education courses with 30 credit hours of accounting courses and 30 credit hours of business courses such as finance, business law, marketing, economics, management and business policy.4 Most courses are three (3) semester/credit hours with 3 contact hours/classroom hours per week over a 15 week period per semester. The primary emphasis of the Principles I (Financial Accounting) course is to introduce the Accounting Process coupled with most financial accounting topics (i.e. Cash, Receivables, Inventories, Property, Plant & Equipment, Liabilities, Equity, Investments, Time Value of Money, and Ratios). It is in this course where the students may be required to complete what has become Journal of Accounting and Finance vol. 13(6) 2013 211 known as a Practice Set requiring the preparation of a set of Basic Financial Statements (Income Statement and Balance Sheet) in order to learn the accounting process with no attached footnote disclosures. Some examples of such Practice Sets are Wijewardena and Philpott (2004) and Halabi et al.
(2004). Traditionally, nowhere else in the accounting educational process are the students required to prepare a complete set of financial statements with the writing of footnote disclosures especially after dissecting some elements of financial accounting such as leases, pensions, investments, the cash flow statement, deferred income taxes, complex hybrid equity transactions, earnings per share and derivatives.
The author acknowledges that other Professors may in fact discuss the interrelationships among the numerous financial accounting topics, however, there may be no explicit evidence of such for accreditation purposes. Moreover, the students are usually required to analyze and audit the financial statements but are not required to “produce a [complete] set of company accounts” with footnote disclosures. It is the author’s opinion that this is a significant void in the accounting educational process.
Accounting Education: Canada At the Canadian University where the Hypo Corporation case was utilized for the third paper in this sequence, the split between business courses which includes accounting courses and general education courses is approximately 70%-30%. This is more of a historical factor because of a 13th year of high school for students that intend to attend college. The 13th year of high school in Canada has since been eliminated. Because of this split between general education and business courses, more time is available for accounting courses. A total of 42 semester/credit hours of accounting courses are required towards graduation. Table 2 below shows the financial accounting courses required at the Canadian University where the Hypo Corporation case was utilized. Actual course titles are in parenthesis. All courses are 3 credit/semester hours with 120 credit hours needed for graduation.
Auditing II 212 Journal of Accounting and Finance vol. 13(6) 2013 Certification/Licensure Finally, it must be noted that in the State of Michigan, United States of America all students must pass a uniform examination, complete an additional 30 semester/credit hours of education after being matriculated at the Bachelor’s degree level, usually a Bachelors of Business Administration degree with a major in Accounting, and complete one year of work experience before they can become licensed as a Certified Public Accountant. Licensure is at the State level. At present, there is little guidance from State Boards of Accountancy as to what the additional 30 semester hours of education should entail.
In Canada, after graduation a student will take a Core Knowledge Exam (CKE) which is comprised of 100 multiple choice questions. A 60% is needed to pass. Then the student will be enrolled in what is called the School of Accountancy which is a 2 to 3 week summer school course covering materials needed to pass the Uniform Final Exam (UFE). The UFE exam is a Case Studies exam. To become licensed as a Chartered Accountant, one must pass the UFE and have a total of three (3) years work experience. Licensure is at the Provincial (Province) level.
HISTORY OF THE HYPO CASE
The Hypo Corporation case was created in 1986 by the author upon his return to academia after many years in practice. It was developed as a formative/summative assessment tool to be utilized in an Intermediate Accounting II course at a university in the United States of America. The Hypo Corporation case was originally utilized as a take-home final exam/case with a weighting of 33% towards the student’s final grade. The students were allotted two weeks to complete the exam/case. Subsequently, the case was updated for changes in standards by a sessional instructor and adopted for use at a Canadian University as a formative/summative course project/case in an Intermediate Accounting II course. The changes were basically in the Investments and Deferred Tax Asset areas with a change of a straight debt instrument to a convertible debt instrument for the intended purpose of testing earning per share of its anti-dilutive effect.